In recent years, embedded finance has been gaining momentum, and it’s expected to continue its growth trajectory in the coming years. According to a recent study, the embedded finance payments market will reach $1.91 trillion by 2029.
As technology advances, consumers have come to expect convenient and customized financial services. As a result, embedded finance has become the norm for businesses, and those with a large user base must offer these financial services to avoid falling behind.
Embedded financial tools help companies reach more consumers, improve data analytics, increase customer retention, and create easier and more secure financial transactions. In reference to the integration of financial services into non-financial platforms and processes, embedded finance allows businesses to offer financial products and services to their customers seamlessly and efficiently without redirecting them to a separate financial institution or website.
Embedded finance solutions can be categorized into three main types:
- Embedded payments allow consumers to pay for goods and services within a third-party application.
- Embedded lending provides instant loans to customers within a third-party application.
- Embedded insurance offers insurance policies and coverage to consumers within third-party applications.
Embedded finance allows businesses to offer tailored financial services to their customers, leading to better customer experiences, increased revenue, and greater customer loyalty. As the adoption of embedded finance solutions continues to grow, it is expected to become the norm in the financial services industry, transforming how we interact with financial services for years to come.
McKinsey & Company suggests that the revenue pools of the banking industry can potentially see 50% of its growth coming from embedded finance products in the near future. Furthermore, there is a significant demand for these financial products, particularly in deposit accounts, lending, issuing, and payments.
Some of the key trends driving the surge of embedded finance include:
Buy Now, Pay Later (BNPL)
BNPL allows customers to split payments into interest-free installments, making online shopping more accessible and encouraging greater spending.
In a BNPL payment model, you can choose a payment program that allows you to make weekly or monthly payments from your bank account instead of paying the whole amount upfront. These point-of-sale loans are rapidly gaining popularity and are driving the enhancement of user experience and customer loyalty by encouraging repeat purchases.
Recent studies show that most small business owners have less than $5,000 on hand for financial crises. In our current difficult economic period, businesses can use BNPL as an embedded finance product to gain a competitive advantage by securing missed sales and stretching invoice payments for better cash flow management.
APIs
One of the embedded finance trends quickly gaining momentum is using APIs (application programming interfaces). Fintech companies are making it easier for businesses to accept and process payments through plug-and-play solutions. By incorporating additional services into their offerings, companies can gain a competitive advantage in the market and drive growth.
Moreover, the rise of APIs creates more opportunities for businesses to pick and choose which services they want to integrate, leading to productive partnerships that cater to even the most sophisticated users.
Digital Wallets & Contactless Transactions
Since the beginning of the Covid-19 pandemic, the popularity of contactless transactions has surged. The global contactless payment terminals market is expected to reach $43.4 billion by 2026, with major players including Visa, MasterCard, Apple, Google, Amazon, and Samsung.
Digital wallets can be a game-changer in controversial sectors like crypto, where staying compliant with relevant regulations and the timely withdrawal of funds are major pain points. Incorporating fiat wallets into cryptocurrency ecosystems allows easy and efficient money transfers without leaving the platform. Digital wallets also help businesses to manage debt, reconcile revenues, assign specific accounts to employees, and safeguard customers’ fiat money.
Digital wallets have numerous use cases, including in-house banking for businesses, crowdfunding platforms, online and e-commerce marketplaces, and more.
DeFi and Web3
DeFi, or decentralized finance, is an emerging trend within the finance industry that uses blockchain technology to offer financial services without needing intermediaries. Decentralized finance platforms allow users to borrow and trade cryptocurrencies and other digital assets without relying on traditional financial institutions.
DeFi is one of the most notable crypto industry technologies since Bitcoin was released in 2009, and more than 6,600 other cryptocurrencies are traded in the crypto market today. This provides greater financial freedom and access to services for individuals who may not be able to use traditional banking systems.
Web3 refers to the third generation of the internet, built on decentralized technologies like blockchain. This new web infrastructure allows for greater decentralization and transparency, creating new opportunities for decentralized finance and other applications. Web3 technologies enable users to access decentralized applications (dApps) and services that operate on a distributed network without relying on a central authority.
Together, decentralized finance and Web3 are transforming the way we think about finance and the internet. Decentralized finance applications built on Web3 technologies are challenging traditional financial systems and offer new possibilities for financial inclusion and innovation.
The total daily volume of DeFi transactions has reached $5.37 billion, representing 10.56% of all global crypto volume. As the world continues to shift towards a more decentralized and interconnected future, we will likely see even more growth and development in these areas.
Tribal Neobanking
The neobanking market is expected to reach $9.42 trillion in 2027, driven by the growth of embedded finance, which offers easily accessible financial services via mobile devices. Business and savings accounts are the main types of accounts in the neobanking market, with business accounts offering services such as:
- Money management
- Bulk pay-outs
- Credits
- Detailed account insights
- International transfers
Tribal neobanking takes customer-centricity to the next level by centering neobanking products and services around specific communities, such as those based on industry, sexuality, ethnicity, culture, religion, politics, or any other affinity. A good example of neobanking is Wahed, which offers halal investing for the Islamic community, and Unibo, a neo-bank for real estate professionals.
Benefits of Embedded Finance
Embedded finance offers numerous advantages for both businesses and consumers, including increased accessibility, convenience, and efficiency in financial transactions. Let’s look at each of these benefits in detail:
- Improved customer experience: Embedded finance enables customers to access financial services without leaving the platform they are already using, which enhances convenience and streamlines the user experience.
- Increased engagement: By offering financial services, companies can increase customer engagement and loyalty by providing more value and creating new revenue growth opportunities.
- More data insights: Embedded finance can give businesses more data about customer spending habits, enabling them to offer more personalized products and services.
- Enhanced security: Embedded finance can provide greater security as financial transactions can be processed more efficiently and securely.
- Greater efficiency: Embedded finance solutions can streamline payment processes and reduce transaction times, leading to more efficient and cost-effective operations.
- Access to new revenue streams: By providing financial services, businesses can unlock new revenue streams and generate additional income.
- Improved financial inclusion: Embedded finance solutions can help individuals and businesses that traditional financial institutions underserve access to financial services, promoting financial inclusion and economic growth.
Embedded finance is a rapidly growing trend reshaping how we do business and interact with money. From BNPL services to DeFi platforms and Tribal Neobanking, the possibilities seem endless.
The benefits of embedded finance are clear, including increased customer loyalty, improved user experience, and enhanced revenue streams. As technology continues to advance, we can expect embedded finance to become even more prevalent and disruptive, leading to a more accessible and inclusive financial ecosystem for everyone.